Instructor: Thomas Christopher Martin 3 rd Year PhD Student

A little about myself…  Commerce Degree Memorial University of Newfoundland  MBA MUN / Université Catholique de Lyon  Ernst & Young /13 - Montreal & St. John’s (Canada)  PhD Business to Present - Trinity College Dublin (Ireland)  Emerging Markets  Global analysis of firm level multi-nationality 1-2

This week its Accounting and Beyond Morning Session Afternoon Session Monday Tuesday Wednesday Intro & Income Statement Thursday Balance Sheet Cash Flow Statement Friday Financial Analysis & Exam Group Assessment 1-3

Grading Scheme  Multiple Choice Test on Friday morning (50%)  Will cover material from previous lectures  Practical Exam to be completed in assigned groups on Friday afternoon session (40%)  Groups of 5 students will work together on a case that reflects the material taught in class  Participation throughout the four days of lecturing (10%)  Open conversation about topics will be encouraged along with attendance of all sessions 1-4

Lakes and Lilypads 5

3 Hats 6 Sand Line Direction of vision Gun Man

Map or Maze  A map helps its user reach a desired destination through clarity of representation.  A maze attempts to confuse its user by purposefully introducing conflicting elements and complexities that prevent reaching the desired goal.  Financial statements have the potential for being both map and maze. 1-7

Financial Statements as a Map  Form the basis for understanding the financial position of a firm  Allow users to assess historical and prospective financial performance  Present clear representations of a firm’s financial health 1-8

Financial Statements as a Maze  Overwhelming amount of information  Unreliable auditing  Constantly changing and complex policies and reporting requirements  Considerable discretion given to management  Key information hidden or omitted 1-9

Map or Maze The main objectives are:  ensure that financial statements serve as a map, not a maze,  demonstrate how to read and evaluate financial statements,  provide the tools and techniques needed to complete a comprehensive financial statement analysis, and  encourage intelligent decision making. 1-10

Map or Maze Usefulness of Information  Financial position  Success of operations  Policies and strategies of management  Insight into future performance 1-11

Map or Maze Volume of Information  Financial statements  Notes to the financial statements  Auditor’s report  Five-year summary of key financial data  High and low stock prices  Management’s discussion and analysis of operations  Other material 1-12

Map or Maze Volume of Information  Generally accepted accounting principles (GAAP)  Securities and Exchange Commission (SEC)  Financial Accounting Standards Board (FASB)  International Accounting Standards Board (IASB)  Issues Statements of Financial Accounting Standards (SFASs) 1-13

Map or Maze Where to Find a Company’s Financial Statements  Annual report  Financial statements  Public relations material  Sent to shareholders and prospective investors  Corporate website 1-14

Map or Maze The Financial Statements  Balance sheet (or statement of financial position)  Income statement (or earnings statement)  Statement of stockholders’ equity  Statement of cash flows 1-15

Map or Maze Notes to the Financial Statements  Integral part of the statements  Summary of the firm’s accounting policies  Details about particular accounts  Other supplementary information 1-16

Map or Maze Auditor’s Report  Attests to the fairness of the presentation of financial statements  Sarbanes-Oxley (SOX) Act of

Map or Maze Auditor’s Report  Types of reports  Unqualified reports (FS give a true and fair view)  Qualified reports (FS are misstated, no affect)  Adverse opinion (FS are misstated, not conforming with GAAP)  Disclaimer of opinion (Opinion cannot be formed on FS)  Unqualified opinion with explanatory language 1-18

Map or Maze Financial Reporting Reforms  SOX Title I – Public Company Accounting Oversight Board (PCAOB)  SOX Title II – prohibits non-audit services during an external audit  SOX Titles III and IV – corporate responsibility  SOX Title IX – harsh penalties for violations 1-19

Map or Maze Proxy Statement  Used to solicit shareholder votes  Important in assessing  who manages the firm  how management is paid  conflict of interest issues 1-20

Map or Maze Missing and Hard-to-Find Information  Employee relations with management  Morale and efficiency of employees  Reputation of the firm  Firm’s prestige in the community  Effectiveness of management 1-21

Map or Maze Continued…  Provisions for management succession  Potential exposure to regulation changes  Publicity in the media  Companies operating in several lines of unrelated business 1-22

Quality of Financial Reporting  Many opportunities for management to affect quality  Timing of revenue and expense recognition  Discretionary items 1-23

 Assets earned by a company’s operations and business activities  Revenue account is an equity account with credit balance  Typically seen as…  Operating Revenues  Non-Operating Revenues 24 Revenues

 Operating Revenue  Sales (Manufactures, Wholesalers, Retailers)  Rent (Landlord to Tenant)  Consulting Services (Professional Services Provided)  Non-Operating Revenue  Interest Revenue 25 Revenues

26 Revenues  Aaron’s Body Shop repairs cars for local auto dealers. Aaron is currently working on a fender repair for Bill’s Auto Lot. After Aaron finishes the repair, he sends Bill a $1,000 invoice for the labor and records the sale in his accounting system by debiting accounts receivable and crediting revenues.  Aaron records the income because he performed the work and has earned the revenue even though Bill hasn’t actually paid Aaron yet.

 Costs incurred to generate revenue  Expense accounts decrease the overall equity balance  There are many examples of expenses that can occur for a business, all fit into 2 categories  Operating Expenses  Non-Operating Expenses 27 Expenses

 Operating Expenses  Rent, Wages, Utilities, Advertising  Non-Operating Expenses  Interest Expenses  Loan Interest from banks 28 Expenses

29 Expenses  Corey’s Food Truck, Inc. is a local food company that delivers sandwiches. Corey places new deli orders for $100 every Monday to a local butcher. When Corey places his order, he debits supplies for $100 and credits cash for $100. This journal entry records the asset, cash, being used up to generate revenues by making sandwiches.  At the end of the year how much does Corey spend on deli meat?  This will be listed as an expense on his income statement.

Accounting Cycle 30

Journal Entries 31  Identify Transactions  A company uses cash to purchase a vehicle  Analyze Transactions  What happened? An amount of cash was replaced by a vehicle, both affecting the asset account but no change overall  Journalize Transactions  A journal entry will record the transaction

Journal Entry Example 32  Separate into groups  Use handout to review 15 journal entries

Trial Balance 33  Each journal entry is transferred to its T-Account  Debits are transferred to the left side  Credits are transferred to the right side

Cash T-Account 34 $32,800

Complete Remaining T-Accounts 35  InventorySupplies  Accounts ReceivableUtilities Expense  Accounts PayableWage Expense  Leasehold ImprovementsInterest Expense  Long-Term Liabilities Rent Expense  Common StockDividends  RevenuesCost of Goods Sold

Unadjusted Trial Balance 36  3 Columns (Account, Debit, Credit)  Standard Title (Company Name, Name of Trial Balance, Date of Reporting Period)  Accounts are entered following the balance sheet order: Assets, Liabilities, Equity Accounts, Income, Expense Accounts

Adjusting Entries 37  Used to record 3 different types of activities  Prepaid expenses or Unearned revenue (Insurance)  Accrued expenses or accrued revenue (Utility Bills)  Non-cash expenses (Depreciation)

Adjusting Entries to Make 38 1) Paul pays his $1,000 January rent in December 2) Paul's December electric bill was $200 and is due January 15 th 3) Paul's leasehold improvement depreciation is $2,000 for the year 4) On December 31, a customer prepays Paul for guitar lessons for the next 6 months 5) Paul's employee works half a pay period, so Paul accrues $500 of wages

Adjusted Trial Balance 39  Same Process as Unadjusted Trial Balance  If an account has a zero balance it does not have to be recorded

Adjusted Trial Balance 40

Financial Statement Preparation 41 Essential part of Accounting Cycle process  Balance Sheet  Income Statement  Statement of Retained Earnings  Statement of Cash Flows